Help a Chicago reader...and an insightful e-mail

This is one of the many e-mails I have received the past few days. I can help with the financial part of things, but I need some people to chime in that have some knowledge of the Chicago market.

Let's take a look at our reader, and see what we can come up with:

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SoCalMtgGuy,

It seems that I'm trying to become a f'd borrower.

Just today I tried to see if we could qualify for a decent rate (if not, there is no sense in buying at all). Lending tree returned offers right away, these are the lowest apr's in each category requested ( 380k loan). I don't know our credit scores.

15 year fixed: 5.405% apr

30 year fixed: 5.893% apr

7/23 ARM, 5.898% apr

I'm thinking of buying in a 3br in the Chicago Loop. We are expecting a baby and need a bigger place. Since our families live far away, we need some room for them to stay when they visit, and we expect stays of 3 months or so. A second baby will probably follow quickly. We'd want to live in this place for a long time, 10 years+. There is low probability that our jobs will take us elsewhere, and the jobs seem relatively secure. We currently rent a super cheap 1br nearby.

We want to spend about 500k with parking (that would be some of the cheapest 3br in the loop; it's easy to find 2br for much more). We have 20% down (barely), and ~200k in income which should grow over time (we are at the beginning of our careers, and no, the income is not RE related:). I figure that a 500k condo would cost us 2600/month in expendables (mortgage interest, tax, assessments, insurance, net of tax benefits). Equivalent rent would be 2200 on the low side, 2800 on the high. I am not counting the opportunity cost of the down payment or any additional maintenance not in the assessment.

I'm looking for a mortgage with the lowest APR possible, fixed for at least 7 years. I don't care about principal repayment, but would like to bring our net worth higher than the value of the condo in 10 years.

The buy/rent decision hinges on the question of the appreciation/depreciation of the condo. A 3% appreciation would make buying it a good deal. Less than that, and it's not a good deal any more. The wife is more adamant about buying than me, but I like the idea as well. Feel free to use it as a example in your blog if you want or find interesting. Your thoughts?
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Well, I like the fact that you are putting money down, and that you have a 6-figure income that appears to be solid per your e-mail. There are a few things I worry about though. You can't shop for rates without knowing a ballpark credit score. Using the lowest advertised rates often leads to disappointment as there are many variables that determine what YOUR rate will be. Most lenders charge more for townhomes and condos than detatched SFR's (single family residences).

My advice would be to get a 30yr year fixed. The spread between a fixed loan and an ARM are so small right now, and the fixed is actually LOWER than the ARM right now (by .005 with your numbers above). I don't think you should pass it up, especially with your time frame. If you plan on staying in the house "10+ years", why would you get a loan that is only fixed for 7 years? Unless you plan on getting the interest-only loan, which I wouldn't advise in your situation, is there any good reason to not get the 30yr fixed?

As far as property taxes, HOA's, and the condition of the Chicago market, I need the help of my 'Windy City' readers. I don't know the market there. 500k for a 3 bedroom townhome would be a 'bargain' in San Diego right now, so we'll have to say what the readers have to say about it.

Even if they haven't had the massive appreciation that California and other places have had, I would still say that you don't have to rush. Take your time and wait for the right place at the right price. I would ideally suggest to wait and see how the market does once 'sping'time hits. We could be looking at huge increases in inventory in many areas as people rush to the exits to cash in on their appreciation.

Whatever happens, I wish you the best of luck!!

This e-mail is sort of long, but I think there are some GREAT insights from somebody that has lived through several up-and-down real estate cycles. I'm sure many of you will be able to relate to this reader...and some of you will get sick to your stomach. Enjoy...
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I read your entry this morning and want to jump at the chance to write you an email. This isn’t so much about a FB as it is about my inability to get my mind around today’s housing market. I’ve recently moved to the SF Bay Area (Peninsula) and after looking for a house, announced to my realtor yesterday that I’m just not going to pay $1,000,000 for a one-car garage. It just isn’t going to happen. Sometimes I feel like a person from the Depression who can never see debt as anything but the path to ruin. Maybe it’s just my age – but I’m not THAT old!

I remember buying in the last housing frenzy – the late ‘80s. I remember the cars parked up and down the streets and the multiple offers. It was insane. I was in the middle of it all and so were all my friends. But - and I just discussed this at length with my husband – I don’t have ANY recollection of anybody taking out loans for 100% financing. Almost all of them were conforming with a full 20% down. A few here or there had less than a 20% down-payment, but for the most part, no one wanted to get into the PMI stuff. And I don’t remember anyone evading it through piggy-back loans! Or paying minimum payments amounting to less than interest and principal! Or lying about their income!

I remember people being desperate to buy because choices were slim. And the fear interest rates might go higher. But not because they felt prices would only go up. No one thought prices could go DOWN, but no one felt they’d be priced out forever if they didn’t pull the trigger immediately. If you found a place you could swing, you jumped at it. You had to live somewhere.

Which brings me to the next thing I don’t remember. I don’t remember ANYONE buying multiple houses for appreciation’s sake alone. I don’t remember ANY “investors”. I think this is the biggest difference to me. This and all the $100,000 chef’s kitchens and Mercedes. People in the ‘80s just didn’t spend money like that. There has been a fundamental shift in our country. Perhaps it’s here to stay and not to join in will be as unwise as the Depression era person forever after never taking on ANY debt. They just didn’t “get” it.

Or maybe it will be like the new web designers of the ‘90s thinking their 6-figure salaries were here to stay. And everyone who came before them deserved lower wages because THEY just didn’t “get” it. Yeah, right...

I have very good friends who also share the experience of buying in the ‘80s. She and her husband are in their early 50s. They bought a spectacular McMansion in SoCal about 5 years ago. Anyone would say they’ll be just fine because they bought awhile back and have some equity. But they put a lot of money into renovations so it’s not quite as rosy as it would appear on the surface. Thankfully, prices have really climbed and there’s still some equity there.

They took out a HELOC to cover the remodel and expected to pay it all back shortly after taking it out. But somehow, it didn’t get paid back but rather got rolled into a refinance with a 7 year adjustable. Because of job changes, the idea of refinancing to a fixed rate was out of the question. And now, it seems that my friend’s monthly income doesn’t meet her monthly expenses. Her husband just got a new contract which is good news. And she’s looking for a higher paying job to get back on track. But I don’t remember any of us with so little job security and simultaneously being so leveraged to debt.

My friends, until this latest housing boom, have always been prudent and conservative. Now, virtually everything is tied up in this house. They are faced with a house they can’t afford, an adjustable rate that will come due in 3 years. And they’re slowly recognizing there’s no way they can expect to live long term in this house. I asked my friend if the house was seen as a “not forever” place to live when they bought it. She said not exactly. It’s just been a slowly developing situation. They expect to gain more appreciation and have options when the adjustable forces their hand. But she’s nervous and sometimes thinks they should sell soon. Her husband is unwilling to even think about it. But mostly she’s very annoyed that a neighbor just sold his house for $200,000 less than asking. She describes him as being stupid when it comes to money.

Another, younger friend has totally cleaned out his equity to pay for renovations. He figures it will only help appreciation. He has a baby and a job with a young tech company. He gets positively ill whenever anybody suggests prices could go down. Or whenever anyone suggests rates could go up. Everything he owes is adjustable.

So having friends faced with these kinds of situations is something else I don’t ever remember seeing before. What a Through the Looking Glass world this has become! More debt is taken on with less job security! Houses become more burdensome with time, not less!

A mania has manifested itself in massive debt, multiple houses, shiny granite countertops, commercial stoves, plasma TVs and Mercedes cars. Happy times. Except the underside of it seems to have snuck up on us. Stress and pressure seems to be building terrifically. And fear. This nightmare will only fade away if positive appreciating numbers keep rolling in. That’s the gamble we’re all taking.

Thanks for your blog. It’s great.

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Have a great weekend everybody, and keep the comments coming. Feel free to hit the 'donate' button as well. This blog is taking more and more time, and I appreciate the people that have donated and/or gone through my site to shop at Amazon.com. EVERY little bit helps!!!

SoCalMtgGuy